Question

Belfast Industries manufactures a single product, the standard cost of which is:

Direct materials – 6 kgs @ £4 kg £24.00

Direct labour – 2 hour @ £8 hour £16.00

Variable overhead – 2 hour @ £6 hr £12.00

Fixed overhead – 2 hour @ £10 hr £20.00

Total per unit £72.00

Other data relating to the standard cost:

* The fixed overhead rate is based on a budgeted output of 4,000 units per month.

* The standard selling price is £110 per unit.

Actual information for the latest month is as follows:

Production 4,000 units

Sales 4,000 units

Sales revenue £440,000

Direct materials:

Purchases 30,400 kgs

Used 22,000 kgs £127,680

Labour – 7,600 hours £63,080

Variable overheads £53,680

Fixed overheads £87,000

Other data relating to the actual results:

* There was no opening stock of raw material.

* All variances are written off to cost of goods sold in the period and stocks are valued at standard cost.

Requirement

(a) Calculate the actual profit for the latest month and reconcile it with the budgeted profit, showing all relevant variances.

(b) For the labour variances calculated, write a brief explanatory note of what information this communicates to management. As part of the note, define interdependence with respect to variances and comment on possible interdependencies that may exist in the case of the labour variances.

Total 25 Marks

Answer 1

	Standard Selling price per unit		110
	Budgeted Sales in unit		4,000
	Budgeted Sales Revenue		440,000
	Budgeted Costs:
	Direct materials (24*4000)	96,000
	Direct Labor (16*4000)	64,000
	Variable overhead(12*4000)	48,000
	Fixed overhead(20*4000)	80,000
	Total Budgeted Cost cost of goods sold		288,000
	Budgeted Profit		152,000
	VARIANCES:
	Sales Revenue(Actual)	440,000
	Sales Variance	0
	Actual Price of direct material per Kg	6	(127680/22000)
	Standard Price per kg	4
	Actual Quantity used in Kgs	22,000
	Material Price Variance	39,680	(6-4)*22000	Unfavorable
	Standard Quantity of material required	24000	(6*4000)
	Material Quantity Variance	(8,000)	(4*(22000-24000)	Favorable
	Material Cost Variance	31,680	(39680-8000)	Unfavorable
	Actual Rate of labor per hour	8.3	(63080/7600)
	Standard Labor rate per hour	8
	Actual Hours of labor used	7600
	Labor Rate Variance	2280	(8.3-8)*7600	Unfavorable
	Standard Hours of labor required	8000	(2*4000)
	Labor Efficiency Variance	-3200	(8*(7600-8000)	Favorable
	Labor Cost Variance	-920	(2280-3200)	Favorable
	Variable Overhead Variance	5,680	(53680-48000)	Unfavorable	(Actual -Budgeted)
	Fixed Overhead Variance	7,000	(87000-80000)	Unfavorable	(Actual -Budgeted)
	Budgeted Cost of goods sold	288,000
	Unfavourable MaterialCost Variance	31,680
	Favourable Labor Cost Variance	-920
	Variable Overhead Variance(Unfavorable)	5,680
	Fixed Overhead Variance (Unfavorable)	7,000
	Actual Cost of goods sold	331,440
	ActualSales Revenue	440,000
	ACTUAL PROFIT FOR THE MONTH	108,560	(440000-331440)
b)	Labor rate variance indicates whether we are paying the labor more than the standard rate
	In this case the variance is unfavorable, which means 2280 pounds additional expense is due to higher rate
	Labor efficiency variance indicates whether actual labor hour is less or more than standard
	In this case the variance is favorable, which means 3200 pounds is saved due to higher labor efficiency